HCS 579 Health Care Finance
September 24, 2005
Working Capital Management in Healthcare
Working capital is the money required to finance the day to day operations of an organization. Working capital may be required to bridge the gap between buying of stocked items to eventual payment for goods sold on account. Working capital also has to fund the gap when products are on hand but being held in stock. Products in stock are at full cost, effectively they are company cash resources which are out of circulation therefore additional working capital is required to meet this gap which can only be reclaimed when the stocks are sold (and only if these stocks are not replaced) and payment for them is received. Working capital requirements have less to do with profitability and much more to do with cash flow. Within the context of this paper, we will review three current articles that deal with specific issues related to the management of working capital. In the article, “Short on capital? You might be surprised who wants to help” we learned that General Electric (GE), the creative company is now bringing light to healthcare finance. Recent surveys of healthcare Chief Financial Officers (CFO’s) revealed that an overwhelming majority feel that the management of working capital has become increasingly more and more difficult and the difficulty will only increase over the next 10 years. Difficulties noted include debt capacity, deteriorating facilities and increasing capital spending on a yearly basis. In 2002, GE launched its Commercial Finance Healthcare Financial Services and has committed more than 13 million dollars to the industry to meet the need for capital. They provide an array of services to include equipment rentals, leasing, and financing; working capital lines of credit; acquisition and turnaround financing; real estate financing; vendor financing programs; and medical and dental practice financing to healthcare organizations of all sizes. GE has identified and focuses on the hospital sector and long-term care facilities. They note that with hospitals’ exploding capital needs and continued pressure on reimbursements and margins, there was a great need for their services. GE has helped healthcare organizations meet their working capital needs at a time when many were having a difficult time. In a second article on GE’s Commercial Finance Healthcare Financial Services, “Hospitals Take ‘Corporate Finance’ Approach to Balance Margin and Mission”, we learn how Effective Financial Management Enables Robust Patient Care. The article speaks to a report that notes “the quality of a hospital’s capital structure can cost or save an organization millions of dollars, a crucial factor for many hospitals struggling to survive in an era of slim operating margins”. The article goes on to outlines eight strategies that healthcare organizations can use to increase their access to capital and gain a strategic financial competitive advantage. The eight strategies outlined will help organizations establish a sound financial approach. They include: * Organizing for effective capital structure management
* Determining the appropriate level of debt capacity
* Determining the optimal mix of debt-to-equity financing and traditional to non-traditional financing * Selecting and achieving the "right" relationship between fixed-rate and variable-rate debt * Diversifying variable-rate debt and avoiding exposure to any one form of risk * Using “swaps” and other derivatives to manage the cost of capital and the capital structure * Pursuing a level debt structure with the longest possible final maturity * Monitoring and continuously adjusting the debt portfolio The article goes on to discuss how an organization cannot become passive in its approach to capital structure. Strategic management of capital structure can often be a competitive advantage for hospitals and is...